2 March 2017

Brand Architecture: the foundation of shareholder value

I was recently a guest at the annual Brand Finance Global Forum. Brand Finance had just published its annual report on global brands and their valuation. David Haigh is the CEO and founder of Brand Finance plc, the leading independent brand valuation consultancy. He announced that Apple had been knocked off its perch as the most valuable brand in the world by Google and indicated that he thought Apple was unlikely to regain its number one position with its current leadership and product mix. This may be fair but Apple has achieved remarkable things in the consumer electronic markets which I know well. Most companies struggle to make good margins as there is perennial pressure on prices which continuously fall while specifications rise. Apple has pulled off the trick of charging high premia for its products particularly its mobile phones. It may not have the number one market share by volume but it certainly takes the lion’s share of the profit.

David’s second point was that the Chinese had well and truly arrived as brand owners. He thought that Trump’s threatened protectionism would open the door for Chinese brands though ironically Alibaba will enable US SMEs to break into China. Historically the Chinese had demonstrated their gift for innovation as they invented paper, printing, porcelain, clocks, gunpowder and possibly even alcohol. We can therefore expect them to convert from copying and counterfeit to innovation and invention.
Thirdly, if we look back ten years the leading brands were dominated by banks. The Lehman crash put paid to that and now all the leading brands are technology based, that is if we count brands like Amazon as technology. The new threat to banks will come from blockchain. (See my blog Blockchain 28th January, 2017.)

Abhinav Kumar is Chief Communications & Marketing Officer for Tata Consultancy Services in Europe. He had just come back from Davos where the principal theme had been the need for responsive and responsible leadership. A year before Davos had collectively written off the ideas of Donald Trump becoming President of the USA and British citizens voting to leave the EU. It now recognised the widening feeling of alienation. While only 37% of people trust CEOs and 29% trust their governments 75% believe in Fake News. 85% believe the system has failed and this leads to the rise of populism. I personally think this is not quite right. Trump was elected with the support of the Republican Party and its machine. UKIP would not have won the referendum on its own just as it has only won one parliamentary seat through the defection of a Tory, Douglas Carswell. The Leave campaign was strongly supported by leading Tory figures like Boris Johnson and Michael Gove. Populist parties in Austria, Holland and France do not have this traditional centre-right support and are thus unlikely to gain power.

Abhinav then set out to show how businesses and brands can build trust. It comes down to how they treat their employees; the quality of their products; how they treat their customers; and whether they pay a fair share of taxes. They must also create jobs, be seen to do social good and their profits must benefit the countries in which they operate. Above all, find a social purpose for your brand.

Digital technology is sometimes seen as a threat with the damage that is done by social media and the destruction of jobs by robotisation. But it has its positive side. Drones are now flying over Indian national parks and catching or preventing poachers of the endangered one-horned rhino. Smart homes will help old people live longer at home. For more examples of Tata’s ideas see www.digitalempowers.com

Philip Gorman is a Senior Equity Analyst at Morningstar. He thinks that mainstream consumer brands do not have the pricing power they used to and this is threatening their long term sustainability. He sees that consumer markets are becoming less homogeneous as millennials and the aging population bifurcate thus giving rise to niche brands. This is combined with the rise of the hard discounters like Aldi and Lidl together with the growth of ecommerce. Barriers to entry are lowering though there are differences between sectors. Premia are highest in the baby sector where young mothers have limited experience and are unwilling to take risks. Premia are lowest in food where trial is low risk and consumers discover that the own label alternative is perfectly acceptable.

I suggested to him that there might be another reason for the decline in pricing power. Over the last few years most marketers have switched huge proportions of their advertising spend from traditional media to unproven and highly inefficient social media. While TV advertising is monitored independently and advertisers know what they are buying Facebook and the rest “monitor” themselves. Facebook has had to admit three times in the past year that its data is inaccurate. Traditional advertising, particularly on TV, supports price premia. Philip was most interested in my suggestion and I gave him some authoritative contacts to investigate this further.

Richard Kramer is Founder & Managing Director of Arete Research. He is an outspoken American who has lived in the UK for 20 years. He maintains a strongly independent stance and points out that most so-called research is financed by the same companies it seeks to analyse. He told us that the leading technology companies have huge plans for investment in R&D. Their spending on Data Centres is enormous with 44 currently under construction. He thinks that these vast digital empires which collect data sets on a massive scale gain more from that than from branding.

However, if a brand can translate into premium pricing the result is profit. There is a Chinese brand of mobile phone called Oppo[i]whose specification is a close match to the iPhone 7 but can only command one third of the price.[ii] Twitter is a brand that utterly fails to make money. Its valuation was originally $45 billion. That has fallen to $9 billion as its losses mount up, but that valuation is still insane. For Richard the key issue is management. Many of these technology companies have no history of management development.

Axel Löbel is Head of Corporate Branding for Merck, the immensely successful pharmaceutical company founded in 1668 and still owned by descendants of the founding family. Its sales are €12.8 billion and it spends €1.7 billion of that on R&D. Axel gave a very professional presentation on how they had undergone a major exercise in corporate rebranding. For a conservative German owned company it was a remarkably brave initiative that seems to have been entirely successful. Merck’s history is complicated by the fact that its US subsidiary was expropriated by the US government when it entered the First World War in 1917. Merck therefore does not own the brand in North America and trades under a different name there.

Roger Scarlett-Smith is the new Strategy Director at Brand Finance but until recently was Head of Global Categories at GSK Consumer Healthcare. In this role he led the GSK Consumer Healthcare integration with Novartis and has extensive experience of building brands, acquisitions and disposals. He offered us a definition of Strategy: “the logic that drives our future prosperity”. He then gave several examples of how this had been followed at GSK. Corsodyl is a phenomenally successful oral healthcare brand that is endorsed by professionals. GSK entered the oral healthcare market when in the merger with Smith Klein Beecham they acquired brands like Aquafresh but later GSK acquired Block Drug, the owners of Sensodyne and have very successfully repositioned it as a more upmarket brand. But GSK believed all its products needed to reflect the science culture of the company and so, although successful, Lucozade, another ex-Beechams product, was sold as its scientific basis was judged insufficient.

While I can support Roger’s definition of strategy I could not resist quoting von Moltke that “No battle plan survives first contact with the enemy “ or as Mike Tyson put it even more succinctly “Everybody has a plan until they get punched in the mouth”.

Conny Kalcher is VP Brand Development & Marketing Management for the LEGO Group. In its annual report on the World’s most valuable brands, based on Brand Finance’s Brand Strength Index (BSI). Brand Finance also assesses the World’s 10 most powerful brands and this year rates LEGO as number one[iii]. LEGO scores highly on a wide variety of BSI metrics such as familiarity, loyalty, promotion, marketing investment, staff satisfaction and corporate reputation. This strength has allowed LEGO to leverage its brand outside its traditional building block business in markets like theme parks, games and movies.

Conny described to us some of the group’s brand values. The genius of the product range is that it is a system - every brick must work with every other. Only the best quality is good enough. The mission is to inspire and develop the builders of tomorrow. The consumer experiences the promise of play, the joy of building and the pride of creation. LEGO receives extremely high Net Promoter Scores. 16% of the range is new every year.

I thoroughly enjoyed the conference with its impressive group of speakers and interesting range of subjects.

[ii] I checked this and it’s not quite right. Oppo is a Chinese brand that makes very stylish smart phones with a strong focus on photography. Its latest products are all out of stock so I assume are selling well. An iPhone 7 is £599 from Apple and the Oppo equivalent is about £300. I might buy one.

[iii] The full list in order is LEGO, Google, Nike, Ferrari, Visa, Disney, NBC, pwc, Johnson & Johnson and McKinsey.